Gabriel: Respect the Fiscal Cliff

This Editor's Choice piece discusses the ramifications of not reaching a deal on the looming fiscal cliff.

So why be optimistic for a deal in the face of such likely resolve and open campaigning on the part of the newly re-elected president? For one, inflation adjustments to shield 27 million Americans from paying as much as $3,600 more in alternative minimum taxes (renewing a fix that lapsed at year-end 2011) must be passed in calendar 2012 or a roiling result will ensue. At a minimum, trying retroactively to redress such tax burdens locked in by federal law would delay refunds for months, further affecting the economy.

This headache creates both an imperative for Congress to act, and a vehicle for at least a temporary deal.

Meanwhile, Obama and the Democrats must avoid a recession caused by going over the cliff. Republicans are not without leverage here, most notably in their ability to lift the debt-ceiling threat that could hang over the economy after Valentine's Day. Regardless of realignment favoring the Democrats, the party faces a challenging election cycle in 2014, as the party controlling the White House for a second term historically loses seats during mid-term elections. Democrats will have to defend 20 Senate seats to the Republicans' 13. Thus, the GOP's willingness to agree to a deficit reduction outline that sets in motion enough savings to extend the debt ceiling for two years, past the 2014 elections, would be major leverage.

For these reasons, the consensus among lobbyists is that the president will press his case as long and as hard as he can before ultimately consolidating a victory that will harvest at least some GOP concessions. This could range from something as small as closing corporate loopholes to a surtax on millionaires. Nevertheless, the least of these concessions might be hard for departing Republicans in Congress to swallow, given 95% of them have signed the Americans for Tax Reform's Taxpayer Protection Pledge. And if you think it's a cinch that the GOP will concede without a fight, that Obama will give up and take nothing if nothing is offered or that a deal by Christmas is inevitable, I'd say you're too sanguine.